For all his sweet, Midwestern ways, FDIC Vice Chairman Hoenig did not pussyfoot around his opposition to TLAC earlier this week.  Last year, he made it clear that he had policy problems with the concept; this week, he did not bother to hide his opposition to the FRB’s proposal, also supported by FDIC Chairman Gruenberg.  Congress can and should settle this spat by remedying remaining U.S. challenges to bankruptcy resolution, but its stubborn inability to do so, continuing EU squabbles, and non-bank opposition to automatic stays combine to weaken an already-fragile key plank – indeed, the most important plank – of the post-crisis reform program.  As this all plays out, the next round of big-bank living wills is a catspaw – the FRB wants them to pass to give TLAC time to work, some at the FDIC don’t believe they can or should, and current law gives big banks few ways on their own to secure a real-world bankruptcy resolution.


Like many, if not all of you, I have zero problem with forcing a big banking organization to lay out how it would close its doors without resort to taxpayer rescue.  We have to do that in our own firm, and I don’t get any of the benefits that could persuade investors to look the other way at emerging risk.  Big banks (if not their parent holding companies) get these taxpayer-supported goodies and thus have an even higher obligation to run themselves without risk to their benefactors. 

However, when I think about what would happen if we had to close Federal Financial Analytics, I know what law applies to which claims how and when.  Big banking organizations are not so fortunate.  In 2016 as in every year since 2010, their resolution plans must be judged under Title I of Dodd-Frank – which demands ready resolvability under the Bankruptcy Code – even though Title II of the law created an orderly-liquidation process precisely because the Bankruptcy Code isn’t fit for purpose when it comes to complex cross-border financial companies with large books of “qualified financial contracts” expressly favored under applicable provisions in that same Code.  Big banks would also have to divorce themselves from foreign operations housed in disputatious regions like the EU to have any credible claim to cross-border resolvability because, despite years of crisis-management group meetings and the like, public policy doesn’t deal well with what would happen in practice if a big bank bit the dust.

Mr. Hoenig believes big banks should plan for bankruptcy even though bankruptcy can’t work unless big banks aren’t as big, cross-border, or as bank-like as other banks are.  The FRB and others at the FDIC believe that big banks can’t be held responsible for the failure of their public policy-makers and instead posit resolution under the orderly-liquidation authority facilitated – indeed enabled – by TLAC.  For Mr. Hoenig to be right, he has to reconcile himself to a very different U.S. banking system that may not meet other objectives even if its simplicity is comforting to many hot-footing it on the campaign trail.  For the Federal Reserve and others at the FDIC to be right, the single-point-of-entry resolution strategies for which TLAC is created must be functional not just in theory, but also in practice.  The complexity of modern finance combined with the structural differences in even a few U.S. GSIBs makes single-point-of-entry an uncertain prospect even if policy objections like Mr. Hoenig’s are discounted.

Still more fundamentally, what have any of the disputes over TLAC, SPOE, bankruptcy, and OLA to do with a real response to ending too-big-to-fail financial institutions?  Even assuming big banks could make both Mr. Hoenig and the FRB happy, what of all the giant non-banks gobbling up ever bigger market share as the largest U.S. banks see revenue starting to show dangerous signs of long-term flat-lining?  Public statements on the few non-bank living wills released this week are far from comforting and most giant non-banks are years away from being forced to reckon with their own mortality.  Many of them would die a different death than might befall a very big bank, but none is invulnerable and many are so inter-connected or critical to market infrastructure as to pose real systemic risk.

Big banks surely could do better and send up more disciplined resolution plans.  But their structures are not just of their own devising – decades of law and rule enabled them to be as large, complex, global, and inter-connected as they are.  If Congress doesn’t like that, Congress should say so.  If Congress likes big banks more or less as they are under all the tough new rules and still – rightly – wants them resolvable under the Bankruptcy Code, not OLA, then it needs to fix the Code.  For all their vaunted power, big banks are creatures of law and rule; if law doesn’t work, it’s unfair to demand that big banks fix themselves – I might better here say neuter themselves – because policy-makers can’t do their job.